In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss:
- Hims & Hers getting into the business of GLP-1 weight loss injections, and what the compounded market means for Novo Nordisk and Eli Lilly.
- Wix's successful pivot to a free-cash-flow orientation, and how the AI wave is pushing the company forward.
Gym stocks haven't worked out for most investors. Motley Fool host Ricky Mulvey caught up with Motley Fool analyst Sanmeet Deo to find out why he has cooled on one fast-growing gym franchisor and a space in fitness that is investable.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on May 20, 2024.
Dylan Lewis: There's a new name in the hottest part of the weight loss market, Motley Fool Money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley Fool analyst, Asit Sharma. Asit, thanks for joining me.
Asit Sharma: Dylan, happy to be here.
Dylan Lewis: We've got two stocks up big today and we are digging into why. The first one up Asit, online pharmacy and healthcare company, Hims & Hers, up over 30% as we record today show on news that they are expanding beyond some of the more conventional health and wellness products, sexual health, hair loss treatments, and are going to be offering compounded GLP-1 weight-loss injections. This seems to be them following a playbook that they've established for other markets with what might be one of the hottest medical treatments in the industry right now.
Asit Sharma: Dylan, Hims & Hers offers personalized subscription care that can often be in the form of telehealth. So you sit with a doctor and then you get a prescription for medications. They work with affiliated pharmacies and now have their own pharmacy manufacturing facilities. They're adding on GLP-1 drugs to something that is already in play if you are a subscriber to Hims & Hers. They have a comprehensive weight-loss program which seeks to treat weight-loss in a holistic way. It almost sounds like Weight Watchers. If you followed the convolution that WeightWatchers has had over the years, sometimes it's focused on exercise, sometimes it's focused on the diet, what you're eating, sometimes it's focused on medication. They combine all of this. They've got a group that is bringing them in something like a $100 million in revenue a year just on weight-loss. Today, we find out they're adding GLP-1 injections, that price point, the subscription is going to be as low as $199 a month. The stock is up 30%, investors see the potential of this and investors have been trained to pay attention to GLP-1, this phrase in particular as it applies to the healthcare industry.
Dylan Lewis: If you don't know GLP-1 and you haven't added that to your vocabulary yet. You might be more familiar with Wegovy, or Ozempic, or Mounjaro. There have been a lot of brand name drugs that have made a huge splash in this space, notably from Novo Nordisk and Eli Lilly. What there'll be offering here with Hims & Hers Asit, is a compound which is very similar to those brand named drugs and something that it seems Hims & Hers uniquely able to offer.
Asit Sharma: That's true, Dylan. The FDA has allowed certain companies to provide essentially a generic or compounded built in-house version of these drugs just because the demand is so high and there are still several medicines under approval. Using this, Hims & Hers has teamed up with a generic wholesaler. They don't mention who, but it's important to know that through their own pharmacies and their affiliated pharmacies, they can basically make this in-house. The licensing the recipe for these drugs and that is a cost savings for them. They're not selling a branded product. As has been the case, if you examine their business model for several years, they try to show subscribers that they are lowering costs over time. This is a great way just out of the gate to show that they can offer something that's really in demand for what you're pointing out to me before we went on air is a fraction of the price of a subscription if you get one of these branded medicines like Wegovy.
Dylan Lewis: I think the monthly treatment costs are over a $1,000 for most of the name-brand products. We've seen that the beginning price you mentioned 199 a month. We'll see what that looks like in terms of number of treatments if it's truly comparable. But the playbook for Hims & Hers has been, takes something that is incredibly popular, like viagra and then make it cheaper and more accessible to the mass market. They've been able to do that through telehealth. I think it's been really great for a lot of people who have health conditions and know the drugs that they need to be taking and are ready for those cheaper ones. What is always concerned me a little bit, Asit, with this business is they are both the prescribing doctor interface and the provider of that medication. I've always worried a little bit about that. Has that been something that you've caught as a risk as well?
Asit Sharma: Yeah, I think so. I haven't followed Hims & Hers as carefully as some other companies that are on my watchlist. But one of our Motley Fool analysts who listeners will have heard before, Sanmeet Deo, did a great presentation last week to the investing team and pointed out the potential opportunities with this company's and the downside if you are that therapeutic caregiver via telehealth, but you're also the prescribing doctor and you're also the entity that's on the hook to make a profit or loss at the end of the day. Now, OK, so Nick's out there stopping you already. Well, isn't that healthcare model in the US? Yes, sort of. But still is there a way that that model can be taken to an extreme and we worry, we as in, I think just as a society that healthcare sometimes can be a bit mercenary at its worst. You can see how this could be an investment risk for those who are considering an investment in Hims & Hers because it's mean that you are really buying into a company that has to prescribe to keep growing. Now, that's not the only way they can keep growing. One of the things I like about Hims & Hers is that they really are trying to get more personalized medicine to their subscribers. Also, there's some benefit to this model. You mentioned the popular drugs and therapies out there that have to do with weight loss. You mentioned viagra. They focus on things that are hard to talk about. Their advertising is all over the place, we've all seen. But dermatology, sexual health, weight loss. If you think about the areas that they're reaching out to, those are ones that are really hard to talk to other folks about. Men in particular don't get up out of the chair and go see a doctor to discuss these problems. So reaching out to an even maybe a generation now that's less inclined to talk in person and more inclined to use an app or, or get through to someone via an app, I think is something good. It can help people who might not otherwise get treatment for these. But man, over time, we'll just have to watch if this company does become too dependent on prescriptions. That's not something that most of us would want to be invested in long term. I'm not saying that that is their model, but the potential is there and I'm glad you brought that up.
Dylan Lewis: Asit, before we hit our next door, I do want to take a step back on the overall weight loss market here. I think it's no surprise that we saw the market reaction to this news because the opportunity with GLP-1 and semaglutide is so big. You look at Novo Nordisk, one of the leading companies here up 275% since early 2021 when these drugs really started to come into the consciousness. Eli Lilly also there with Mounjaro up 350% since early 2021. How are you making sense of this market and the investable opportunities here? Because we're seeing the conventional pharma approach, we're seeing the follow-on brand lists approach. Is there anything that's more or less interesting to you from an investing standpoint?
Asit Sharma: Well, I'll tell you something that's neither of those, Dylan. [laughs] Let me explain. I think there's a little bit of GLP-1 fatigue.
Asit Sharma: I think investors are waking up to the fact that the big pharmaceutical companies have benefited a lot, those who've got their medicines out. But now you get to different use cases, so you still have to get those drugs past the FDA, still have to have them commercialized. So some of those big, quick opportunities seem to be less resilient now. When there's a concentrated play like this, that's why investors wake up and the stock is up 30%. But I like the wholesaler aspect to this. There's a company called McKesson, some free IP here just recommended in Stock Advisor, our flagship newsletter, rerecommended. We discussed the fact that a company like that, which is maybe a little bit lower growth, huge sales volume, low-profit margin. But turns out a lot of absolute dollars in profit. They benefit from this whole wave regardless who gets the approval, someone's going to get approval for the next wave of drugs. They're the largest distributor in the US so they're going to benefit, they'll get a slice of that. That's looking for opportunities like that where you don't quite have to place the bets because we're getting to where that easier money has been made and it's going to be harder to identify what really would propel it a GLP-1 type investment.
Dylan Lewis: I'm happy that you ordered off menu for what it's worth there, Asit. I love it. Also up big today, website builder Wix shares up 25% after earnings Monday. Asit, this is one of those companies that kind of went through the COVID growth ringer. They emerged on the other side of that, a much more disciplined, much more free cash flow oriented business. It seems like that's what the market is responding to in these earnings results.
Asit Sharma: Totally Dylan, this company was back in the heyday of websites and extremely successful, fast-growing SaaS type business. Then that all taper off as you point out, the pandemic had something to do with that, but just the idea of building websites. That's been their model both for individuals out there who get premium subscriptions and then agencies, advertisers who are their business clients, they call them partners. All that model was slowing down some, and management had to come to earnings moment. They came to the market and really explicitly said this: we're going to be judged on our cash flow going forward. Our growth is slowing, but we're going to pay attention to our business. We are going to be a very positive cash-flow generator. They've largely executed on that in the 2-3 odd years since management first brought this up. But something else happened, which is very interesting too. We had this whole wave of generative AI, and we've seen different companies come to terms with what AI can do for their business or disrupted. I really liked the way that Wix just jumped headlong but in a thoughtful way. So both jumped into AI, jumped into the innovation, dialed up the hype factor, but brought the bonafides. Brought the real credentials. What I'm getting to hear is that they have a very interesting website builder, which is basically a conversational AI builder. You start chatting with the bought. It develops a website instantly for you and says, how do you like this? What do you want to change? That's a very powerful tool. But what management has been pointing out, which is I think really taken very nicely by its business partners who really provide the bread and butter of this business model. This isn't just like a cool website design. It's a fully functional site, it's got tested security. The SEO is top-notch. The page design is really flexible. The APIs can be tweaked on a moment's notice, and typically you could do that if you're using a more advanced version called Studio, maybe conversing with the bot. It's got all the underpinnings of their business, all the processes that they developed, all the techniques they've honed. I don't want to call it magical because it's Monday, like be short on the hyperbole. We'll save that flight later in the week, but it's pretty nifty. They delivered on that, and customers love it. They've started to grow a little bit faster with those partner clients because of this and they raised their outlook for next year so two stories that have sort of come together.
Dylan Lewis: Yeah, I think if you haven't checked out their website-building demos with AI, I would highly recommend it. I think it's one of the cooler and more kind of immediately communicates the power of technology type executions that we've seen from a business, and customers have gotten on board management said a hundreds of thousands of sites already built using the tool over just a few months so the product is clearly resonating. With the performance we're seeing with tailwinds of AI, where do you put Wix as an investment opportunity? Is it something that's interesting to you? Is it something that's on the watchlist? How are you categorizing it right now?
Asit Sharma: Yeah, I'm kicking myself, Dylan, because there's a service that I work on where we named it like two years ago as a watch-list company and then didn't buy it. Sometimes the hardest thing to do is to listen to a seasoned management team when they're doing an about face, if they've executed in the past and they tell you, Look, we're going to change our business. Sometimes, it's good to say, I'll take a little bet on you because you've everything you've said in the past, you've executed on, and I didn't listen hard enough to imagine when they did that. Of course. Now, Mea Culpa, of course, they didn't foresee what generative AI could do to a business like this. The stock has very aggressively climbed off lows that it hit in 2022. It may be approaching sort of like a fair value for now, but it's still, if you are an investor who likes to crunch cash-flow numbers, looks like a business that could have some value. You buy in today, you're patient with it, those cash flows are going to increase and they've added on the element of now using some of that excess cash flow to buy back shares. I think it could still be interesting for those who want to follow an AI-facing company that also is now profitable, has those cash bonafides, maybe not from here, and other two-and-a-half times like they've done in the past 18 months. But certainly, one that could beat many other companies in the market over the next five years.
Dylan Lewis: Asit Sharma, appreciate you helping me check off the boxes on all of the 20-24 bingo card topics with today's show, weight-loss, drugs and AI. Thanks for waiting through it with me.
Asit Sharma: This is great, thanks so much Dylan.
Dylan Lewis: Coming up. We're sticking with the wellness theme. Jim stocks haven't worked out for most investors. Ricky Mulvey caught up with Motley Fool analysts Sanmeet Deo, find out why he's cooled on one fast-growing Jim franchiser and a space and fitness that is investing.
Ricky Mulvey: Sanmeet, I know you've followed the health and fitness space for a long time. You followed a lot of these gyms stocks. When you look at the chart on pretty much any extended timeline, it doesn't look good for the shareholders. I feel like are we in the case of maybe a good product, but a bad stock for a lot of these gym stocks?
Sanmeet Deo: Yeah, I think so. It's one of those things we talked about a lot. You know, you can have a good business but a bad stock and vice versa. A lot of these gyms have some great boutique classes. You have your [inaudible], yoga, boxing, LifeTime has some great it's a great facilities with all kinds of classes. I go there myself actually treating their new, their innovative, there are different ways of working out. So they're good products, people love them, they go, they connect with other people, the instructors. People enjoy the classes, they enjoy the environments. They've hit on something with those products, but the stocks have just not been very good. They've all over the past three years, when I'm talking about LifeTime, Planet Fitness, Xponential, and Peloton, all have gotten crushed. Specifically, Peloton and Xponential Peloton down over 95% over the past three years, Xponential over 31%. They've been hit hard.
Ricky Mulvey: Even LifeTime, LifeTime is supposed to be that luxury top dog in this category. You would expect it to do a little bit better if you just walk in and see what's going on there. What's going on with these stocks after the pandemic?
Sanmeet Deo: I think in general, the fitness business is just a very difficult business. I mean, I can say that from firsthand experience, I owned a boutique fitness franchise. We operated it. While you can get an influx of members and excitement and the business starts off, strong.
Sanmeet Deo: Sustainability of the business is very hard. People are fickle when it comes to fitness. They want to try different things. They start, they stop, they're all over the place with their fitness, and it's a difficult business to keep these customers locked in and captured. The churn is extremely high, and especially these boutique fitness brands. Even the churn on a lifetime, it's an expensive membership, so when times get tough, where are they going to cut? They're going to cut LifeTime. Planet Fitness has been OK. Their membership has been about $10 a month, now they've raised it to $15 a month. Generally, I think people tend to keep it because it's like a call option on fitness. They think I'll go at some point, I don't need to cancel. The businesses are just generally very tough. Customer churn, keeping people motivated and coming in, and cancellations, and all those things.
Ricky Mulvey: Well there seems to be an economic issue where you're most engaged customers, you may lose money on if they come to the gym every day or five, six times a week. The people, they're making money on are those who sign up for the membership but then aren't coming to the gym. One would think that those are, not even one would think, I think those would be the ones who are the most incentivized to cancel and then churn out of their membership. For any of these, do you think there's an opportunity to buy low or are these all down for good reasons in your view at this point?
Sanmeet Deo: I think most of them are down for good reasons. Planet Fitness is one I continue to monitor because the churn issue is less of a factor. I think because of the lower membership price. The business model itself is a little bit stronger than some of the others, but all these others I would not fish in that pot.
Ricky Mulvey: Now let's get to the rant you were stoking me with on Slack last week where it's about leadership as well, which seems to be a problem in a lot of these gyms. The warm ups for this are stretching motions will be for Planet Fitness and Peloton where Planet Fitness CEO Chris Rondeau was ousted by his board last year. Barry McCarthy, after about two years at Peloton, is out after just two years. What do you think is going on? Why are all of these CEOs seemingly in the hot seat with the exception of LifeTime Fitness?
Sanmeet Deo: I think it's an interesting breed of executives that we get at these fitness companies. Planet Fitness CEO was literally surprise ousted on his marital, he was surprised. There's reports that employees alleged that there was a toxic high school environment, and it was just not a good place to work. I have a quote here that says, "It was portrayed as a fitness employee's gone wild." The environment that he created was not great. The Peloton CEO, he came in to turn around the business. Started off, laying off a whole bunch of people rebranded, focused on the app, did a bunch of things to work to turn around the business but ultimately, he also left on his own accord, he resigned, or at least we think so. I think it's because he claims it's in growth mode now, the layoffs are done and everything, but It's just too hard to turn around, and so then I think that's why he left. Something about the executives in those fitness industries is maybe it's just, they're working out too much and they're all pumped up. Who knows and what's happening there.
Ricky Mulvey: Let's talk about a franchise where you follow pretty closely. We've talked about it a few times on the show, I used to own the stock, it's Xponential Fitness, which owns Club Pilates, CycleBar, Yoga Six, here was the pitch, is that you've got a fast growing fitness chain that's buying up brands aggressively expanding into retail centers where there's a lot of space for something like this to go to where people are hungry for community, so they're going to want to go to these Club Pilates classes. It's going into LA Fitness locations, even cruise lines they're signing deals with, and then something changed Sanmeet, what happened?
Sanmeet Deo: They had a lot of interesting brands there. It's almost like it was a business of a portfolio of fitness brands and that was their thing. What happened is a short report came out exposing the CEO for some past suspicious stock boiler room activity that he was involved in, also creating a toxic environment within the company. Also, something that happens ally in fitness franchises is franchisees complaining that they misrepresented the amount of one, investment to open up these gyms, and also the profitability of those gyms. A huge amount of franchisees, especially their smaller brands weren't making money. The company was claiming that they hadn't closed any gyms. The short report claimed that they had a lot of closed gyms. They were just buying them up onto their own balance sheet, and so it looked like they weren't closing gyms, so it was exposed.
Ricky Mulvey: I want to be clear, that former CEO Anthony Geissler denies this. However, this was reported in the New York Post and also on a Bloomberg Businessweek story, which is that in a mediation session with a franchisee. Geissler allegedly threatened to decapitate the franchisee over a disagreement essentially saying that he would put their head on a spike. Sanmeet, you wouldn't call that a best practice, would you?
Sanmeet Deo: No, you don't want to disenfranchise a franchisee because those are the people that are paying the royalties, opening up your businesses, and keeping your business going. You want to have a good relationship with those franchisees, and when a CEO is deemed to be a bully to the franchisees, the franchisees are not going to take well to that.
Ricky Mulvey: This has been a company you followed closely, you were excited about the indefinitely cooled off on, what was your breakup point with Xponential? When were you ready to hand in your subscription on that one?
Sanmeet Deo: In one of our services where we had recommended it, the team and I talked after the short report, we spent some time digesting it, and we just felt that the risk reward on the company was not, the dark clouds over the CEO, and it's hard to trust. Ultimately when we invest in stocks, we're almost giving our money to these executives to manage via their business, and we didn't trust that he was the right person to do that. While the business model as a franchisor with royalties, high margin, recurring royalties was nice, there was just too many dark clouds hanging over the company, potential investigations, franchisees disenfranchised with possibly more lawsuits, and now it's under investigation. Too much hair on the stock to say, let's stick in and see how this plays out.
Ricky Mulvey: While the gyms have not worked out, it's very difficult to invest in them. Is there anything fitness, health adjacent that you think is investable and attractive to stock investors?
Sanmeet Deo: Fitness industry is a huge industry and it impacts a lot of other businesses as well. When I think of investing too, picks and shovels companies are always very attractive to play a trend or an industry, and picks and shovels of the fitness industry is what we wear, shoes, apparel. What we wear to the gym, what we use, the equipment to the gym. Lululemon is one that I still like a lot. It's a very healthy business that's generating tons of cash. They actually too fall right into the connected fitness and digital fitness realm, and now they're out of that and they're focused on what makes their business strong and they're delving into some shoes. That's a great business. Nike is another one that's just tried and true. They've had some recent struggles, but that's a classic brand that will be around for a very long time. They'll go through their ups and downs, but that's another one that's pretty solid.
Ricky Mulvey: Those of which I'm a little bit of a downswing makes them more appealing to someone like me. Sanmeet Deo, appreciate your time and your insights. Thanks for checking out the gyms with me.
Sanmeet Deo: Thanks, Ricky.
Dylan Lewis: As always, people on the program may own stocks mentioned in the Motley Fool, may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.
